Omaha Plating Corporation is considering purchasing a machine for $1,500,000. The machine is expected to generate a constant after-tax income of $100,000 per year for 15 years. The firm will use straight-line (SL) depreciation for the new machine over 10 years with no residual value.
What is the estimated accounting (book) rate of return (rounded to two decimal places) on the initial investment?
A) 6.67%.
B) 10.00%.
C) 13.33%.
D) 16.67%.
E) 23.33%.

Question

Quizplus · Accepted Answer

The accounting rate of return is calculated as the average annual after-tax income divided by the initial investment. The average annual after-tax income is $100,000. The initial investment is $1,500,000. Thus, the accounting rate of return is ($100,000 / $1,500,000) * 100 = 6.67%.

Omaha Plating Corporation Is Considering Purchasing a Machine for $1,500,000